MAY 2007
More Security May Have Cost-Saving Benefits
Illustration by Stuart Bradford
High speed and low cost have been keys to international trade. Now there is a third imperative: security.
by Margaret Steen
Companies that move goods around the world have been forced by everything from natural disasters to post-9/11 government regulation to add security measures. The cost, estimated to run in the billions of dollars, is significant, especially for those facing intense competition and pressure from shareholders to keep profits up. Now, a new study finds that although improving security does indeed cost money, it also produces benefits and may even lead to procedures that improve profits.
Three researchers from Stanford’s Global Supply Chain Management Forum, a collaborative program of the schools of Business and Engineering, studied 11 manufacturers and 3 carriers to see what benefits they had gained from the security measures they had put in place. Their report, “Innovators in Supply Chain Security: Better Security Drives Business Value,” was published in 2006 and was produced in collaboration with the Manufacturing Institute, the research and education arm of the National Association of Manufacturers, and IBM. The authors are Barchi Gillai, a lecturer and director of research of the Forum; Lesley Sept, associate director of the Forum; and Gauri Bhat, a research assistant.
“Companies usually look at the direct benefits” of security investments, but those don’t tell the whole story, Gillai said. “My hope is that this study will help companies look at things in a different way and see that they shouldn’t focus only on the direct benefits but also see the business implications of their investment in security.”
Any company doing international shipping was affected by new regulations after 9/11. The U.S. government started requiring customs officials to receive detailed electronic information on the contents of ocean containers 24 hours in advance. Another government initiative allows cargo containers to be fast-tracked when they arrive in the United States if they have been pre-screened.
The new government rules have helped many companies get better, timelier information about the shipments of their products, which can lead to better distribution and happier customers. For example, one company said it used to receive documentation about what was arriving in a shipment just two days before a ship docked. Now, because of the new regulations, the company gets much more timely information, with documentation arriving five days in advance.
Even in areas that aren’t regulated by the government, companies are changing the way they do business in the face of security risks to their supply chains. Specific needs vary by industry. Companies that deal with hazardous, flammable raw materials, for example, need to guard it differently than those that are trying to keep people from stealing small, finished consumer products.
Some of the initiatives companies have taken to improve security include making improvements to their facilities to protect them from natural disasters and using interchangeable or generic parts, or more suppliers or locations, to increase flexibility in the event of disruption to their supply chains.
Some companies enhanced their internal security by instituting or increasing employee background checks. Others changed the way product packages or containers are sealed to make them more difficult to tamper with. At least one company started adding security requirements to its contracts with its suppliers.
In general, the companies in the study found that although improving security does cost money, it also produces benefits in several areas beyond a more secure supply chain. For example, one company said that because its new security policies require advance notice of what will be arriving and when, it now has better control over the raw material inventory at its production facilities. Another company was able to completely eliminate theft from its supply chain by adding an array of security techniques, from using teams of drivers instead of single drivers to using radio frequency identification (RFID) technology to track containers and trucks.
Yet another company started using a tool to electronically share information with its logistics providers and suppliers. This helped it get better information faster and find inaccuracies in its data. The company expects this tool to help cut its ocean shipping costs by 30 to 50 percent.
A company that used RFID technology to track containers and railcar shipments found that, in addition to improving security, the solution allowed it to largely automate a previously labor-intensive process. The 80 percent increase in automated data handling meant fewer data entry errors from humans.
It is difficult to assign a dollar value to the benefits that resulted from each improvement in security, Gillai said. One reason is that security is a sensitive issue, and companies are reluctant to divulge too much about how they handle it. But even when a company calculates how much money has been saved due to lower shipping costs or a reduction in theft, for example, the company often has done several different things to bring about these improvements, and it can be nearly impossible to determine how much of the savings came from one specific aspect of security.
However, some of the companies in the study did say that “those benefits, at least for their companies, more than compensated for the investment that they had made,” Gillai said.
Gillai said the key to benefits from many of the security improvements is not just getting new information but learning what to do with it. For example, a company may start putting devices on all its cargo to track its location.
“They get all this data about where the goods are. The main question is, what do they do with this information? Are they able to make intelligent decisions about their inventory management? Do they interact appropriately with their customers to let them know of any potential delays?” Gillai said. “Much of the value they can realize depends on what exactly they do with all the data they get.”
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security benefits
Of the eleven manufacturers in the study, eight said they could identify specific benefits that resulted from their increased security efforts. The other three explained that since they already had robust security systems in place for many years and/or have taken over the years numerous steps to improve the efficiency of their internal operations, they could report very few additional benefits following the adoption in recent years of government regulations or voluntary initiatives. Here is a partial list of the benefits those eight companies found.
7 of the 8 companies experienced:
a reduction in cargo inspections
6 of the 8 companies saw:
less theft of their products
better access to data about the location and condition of their goods
money savings from improved visibility into their supply chains (The
average savings figure from the two companies that were able to quantify the
savings was 7 percent.)
5 of the 8 companies said:
their shipping information was more accurate
added security measures allowed them to identify problems more quickly
customer satisfaction increased due to the measures put in place
4 of the 8 companies said:
they cut steps from their supply chain processes
they experienced a reduction in the delivery time window or the variance
in transit time
product tampering was reduced
3 of the 8 companies reported:
reduced inventory levels
more on-time deliveries
reduced time between order placement and shipping
2 of the eight companies said:
they were able to reduce staff
customer attrition decreased